BATAAN CIGAR AND CIGARETTE FACTORY, INC.

, petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
G.R. No. 93048 March 3, 1994

FACTS:
Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of
cigarettes, engaged one of its suppliers, King Tim Pua George (George King), to deliver 2,000
bales of tobacco leaf starting October 1978.

On July 13, 1978, BCCFI issued crossed checks post-dated sometime in March 1979 in the total
amount of P820,000.00.

BCCFI agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure
to deliver in accordance with their earlier agreement relying on the supplier's representation that
he would complete delivery within three months from December 5, 1978. Again petitioner issued
post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September
1979.

On July 19, 1978, George King sold at a discount check bearing an amount of P164,000.00, post
dated March 31, 1979, drawn by BCCFI, naming George King as payee to SIHI. On December
19 and 26, 1978, he again sold to respondent checks both in the amount of P100,000.00, post
dated September 15 & 30, 1979 respectively, drawn by BCCFI in favor of George King.

On March 30, 1979, BCCFI issued a stop payment order on all checks payable to George King,
due to his failure to deliver the bales of tobacco leaf as agreed despite petitioner's demand.
Subsequently, stop payment was also ordered on the other checks on September 14 & 28, 1979,
respectively, due to George King's failure to deliver the tobacco leaves.

Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only
BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a
holder in due course. It further said that the non-inclusion of King Tim Pua George as party
defendant is immaterial in this case, since he, as payee, is not an indispensable party.

ISSUE:
Whether or not SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to
be able to collect from the drawer, BCCFI.

RULING:
The Supreme Court held that SIHI is not a holder in due course. Consequently, BCCFI cannot be
obliged to pay the checks.

A check is defined by law as a bill of exchange drawn on a bank payable on demand. There are a
variety of checks, the more popular of which are the memorandum check, cashier's check,
traveler's check and crossed check. Crossed check is one where two parallel lines are drawn
across its face or across a corner thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a particular banker or a company is written
between the parallel lines drawn. It is crossed generally when only the words "and company" are
written or nothing is written at all between the parallel lines. It may be issued so that the
presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does
not mention "crossed checks," although Article 541 of the Code of Commerce refers to such
instruments.

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing
of a check should have the following effects: (a) the check may not be encashed but only
deposited in the bank; (b) the check may be negotiated only once — to one who has an account
with a bank; (c) and the act of crossing the check serves as warning to the holder that the check
has been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course.

It is then settled that crossing of checks should put the holder on inquiry and upon him devolves
the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this
respect, the holder is declared guilty of gross negligence amounting to legal absence of good
faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, and as such the consensus of
authority is to the effect that the holder of the check is not a holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George
King. Because, really, the checks were issued with the intention that George King would supply
BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder
in due course. Consequently, BCCFI cannot be obliged to pay the checks. Still, respondent can
collect from the immediate indorser, in this case, George King.

WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is
hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of
Appeals is hereby REVERSED. Cost against private respondent.